ETF Market Check:Protective Options Trades

By Brendan Conway

In ETF-land, for at least a few big derivative traders, Thursday was a good opportunity to lock in gains by buying put options on several widely held funds. It’s not necessarily “bearish” activity. But the fact that so many of the options market’s big trades today were defensive certainly injects a note of caution on a day that the Standard & Poor’s 500-stock index crossed 1400 for the first time since June 2008.

Susquehanna Financial Group’s derivatives strategists note that today’s trading included a big buyer of put-spread protection on the SPDR KBW Regional Banking ETF (KRE) that appeared to signal concern about a drop beneath $28 by mid-June. The ETF, which holds stocks like SunTrust (STI) and Synovus Financial (SNV), was ahead by 1.9% at $28.81 in late-session trading. Another trade took up a large “put butterfly” spread targeting the SPDR S&P Homebuilders ETF (XHB) to $19 by mid-June. The XHB rose 2.5% to 21.82 recently.

The firm also noted what looked like bearish trading in puts to sell the Technology Select Sector SPDR (XLK) at $30 by April,a move that also included the sale of $27 puts.The fund rose 0.3% to $29.99 recently.

Finally there was similar activity on the Consumer Discretionary Select Sector SPDR (XLY), in April $44 and $42 puts. The fund was ahead by 0.3% at 44.63 a few minutes before the close of trading Thursday.

Again, you shouldn’t read terribly much beyond the fact that big traders in the options market — who presumably know a thing or two about making money in stocks — were using the sunny weather to stock up on umbrellas.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.